An independent SBP: Weighing the arguments
THERE are various opinions shared by economists and people at large on SBP autonomy. Recently, the SBP amendment bill was passed by the Senate with a very thin majority.
It seems that not only the public, but elected representatives are divided on the issue as well.
In this brief article, an effort is made to present the arguments in favour and against an independent central bank so that people can make informed opinions about the issue.
First, we take the arguments in favour of an independent central bank.Globally, it is suggested to have an independent central bank.Independent reporting and assessment is necessary.SBP reports need to be more objective and even critical when needed.
When CPEC started, for a while, there was limited clarity of reporting on whether it was debt or investment.
Independent central bank can ensure more transparency, especially when there will be an external audit.
In a Ministry of Finance dominated regime, the central bank just acts as an accommodative and facilitating institution.
But, then it may be politically utilized.Just before election years, we see governments increase their debts excessively and try to end political terms with the economy having high growth.
But, it also results in high inflation and sooner or simultaneously interest rates rise as well.
Fiscal Responsibility and Debt Limitation Act 2005 was a way to restrict the government from excessive borrowing, but the government did not limit its borrowing to 60% of GDP.
It means that the 2005 Act was not enough in itself to limit excessive deficit financing.
Running high deficit, high borrowing from SBP, high inflation and subsequently high interest rate which crowds out private sector credit is a familiar story repeated in cycles.
In the last 10 to 12 years, several SBP Governors had been changed if they objected to this cycle which only leaves the economy with high fiscal deficit and high inflation in the long run.
In this regard, having an independent central bank is expected to bring better check on the government not to over utilize deficit financing for political motives.
Next, we list the apprehensive arguments about an independent SBP.Independent central bank still has to be answerable to Parliament.
Even Ben Bernanke and Alan Greenspan in the US had to face the Senate and defend their policies before and during the Great Financial Crisis.
In some ways, the act seems to take away the right to hold SBP Governor(s) accountable before state’s institutions for scrutiny and inquiry.
Pakistan, being a developing country with a fragile currency, cannot be expected to benefit always with a market-based flexible exchange rate and interest rates.
It needs growth stimulus.For example, during Covid-19, SBP came up with various credit support schemes.
There is apprehension that such schemes would be given less priority when SBP starts focusing primarily on inflation targeting.
Now, inflation targeting itself has been a policy regime with mixed results, especially in economies like Pakistan with low level of financial inclusion (Around 20% have formal bank accounts and less than 5% have access to credit) and a significant informal economy (Around 30% of GDP).
When the government raises utility tariffs for petrol, diesel, gas, water, electricity and raises duties and taxes on imported goods, consumption and services, then a tight monetary policy stance can stifle growth for all sectors and not contain inflation in specific segments from where it originates due to government mandated price increases or taxes.
Even in the US, with high financial inclusion and enormous personal debt, quantitative easing did not result in inflation.
It is hard to conceive that SBP will be able to successfully contain inflation in a country with dismal financial inclusion and access to credit and where inflation has mainly supply side reasons.
If money is non-neutral as argued by Keynesians in an economy like Pakistan where economic activities operate under potential, the role of accommodative monetary policy for stimulus cannot be undermined.
In Pakistan, several industries have low capacity utilization.UNDP’s National Human Development Report (NHDR) in 2019 claimed that an additional 1.4 million or more people of working age will join the labour force every year for the next five years in Pakistan.
Incentive packages and low policy rate seems to work, especially in crisis.
Of course, this is not a cure-all for everything and has to become sustainable at some stage without need for further dosage of incentives.
Nonetheless, the economy did seem to recover under a low policy rate.When the IMF dictated a tight monetary policy stance was adopted, neither inflation went down nor could the economic growth momentum be sustained.
There is already less pressure on the banking sector to operate in agriculture and SMEs.
They increasingly rely on an opportunity to lend to the government.Despite high banking spreads, they are still majorly invested in government treasuries.
Now, SBP will have less of a role and cushion to use moral suasion to stimulate credit in priority segments by banks such as rural credit, agriculture credit and credit to SMEs.
If the government will have less of a control on arranging financing for itself from SBP and has to compete for funds, then the banks may continue to neglect private sector credit, especially to SMEs.
—The writer is Assistant Professor and Finance Faculty Cluster Head at SZABIST Karachi.
